If you are considering becoming a loan guarantor for someone, it is important to understand that you will be undertaking a very serious commitment. Therefore understanding exactly what you will be entering into should be number one on your list of priorities.

What is a Guarantor Loan?

The first thing to understand is the concept of a guarantor loan. A guarantor loan is an unsecured loan but to reduce the risk to the lender, the borrower will enlist the help of someone they know to ‘endorse’ or ‘guarantee’ the loan application. What this means is that whilst the borrower may have the application refused or declined on their own (for reasons such as a poor credit rating or being unemployed), by enlisting the help of a guarantor, the application will receive an immediate boost. This is due to the fact that someone with a good credit history will show to the lender that the borrower is a trustworthy person to lend to because they are prepared to guarantee the application.

Increasingly Popular Form of Credit

With guarantor loans becoming an increasingly popular form of credit, the most obvious next question is “who can act as a guarantor?” Criteria may differ from lender to lender but one theme which will be current amongst all lenders is that the guarantor must own their own property, either outright or through paying a mortgage. Guarantor lenders are reporting a wide range of guarantors being used but most popular choices tend to be close friends and family. Other popular choices for loan guarantors can be work colleagues or even your boss or team leader. Another group of guarantors being put forward are the applicant’s landlord.

A specific group of guarantors which is currently on the rise is grandparents. Until fairly recently this would not have been an option because most lenders capped the age of a guarantor at 65 but now the upper age limit has been raised to 75 at the end of the loan.

Grandparents can make ideal guarantors as typically they will either have a small mortgage or are in the enviable position of owning their home outright. As such, grandparents tend to have more disposable income which makes them ideal guarantors.

What Will a Guarantor Have To Do?

The lender will expect the loan guarantor to provide some documentation as part of the formal application process. The required documents may again differ from lender to lender although the vast majority of guarantor loan companies will require the chosen guarantor to provide proof of identity (a copy of their passport or driving licence usually) along with a bank statement to allow the guarantor loan lender to accurately assess affordability. Both of these documents are also required to comply with money laundering regulations.

Again one theme that is common to all guarantor loan lenders is that they will need to credit search the guarantor. This is a critical part of the process as the lender must ensure that the guarantor has a healthy credit history and will remain in a position to step in and pay the loan if required to do so.

Amanda Gillam currently work as a blog writer for a finance company called Solution Loans which specialises in Guarantor Loans. I hold a degree in financial management and enjoy writing about a variety of topics including finance, transport, travel, sport and business.